Turning Off the Dividend Spigot

By Viral Acharya, Diane Pierret and Sascha Steffen

...the risks arising from non-financial corporate issuance of foreign currency-denominated bonds are very real...so long as the authorities use their existing prudential tools wisely, they appear manageable.

By Viral Acharya, Diane Pierret and Sascha Steffen

European banks’ high litigation and restructuring costs have resulted in major losses on their books and abysmal stock-market performance. As the industry and European regulators now reflect on this dismal state of affairs and search for solutions, they should consider banks’ revenue distribution – including employee bonuses and shareholder dividends – as part of the problem.

Revenue distribution is one primary reason for European banks’ capital shortfalls. To understand why, we should look back to October 2014, when the European Banking Authority began balance-sheet stress tests for the eurozone’s largest 123 banks and found a capital shortfall of €25 billion ($28 billion) in all of them.

At the time, the EBA required the banks to devise plans to address their respective shortfalls within 6-9 months. Some banks took action and raised equity through rights issues, sometimes with substantial help from governments. But most banks mollified regulators by simply shedding riskier assets to improve their capital ratios.

Read full article as published in Project Syndicate.

Viral Acharya is the C.V. Starr Professor of Economics and the Director of the NSE-NYU Stern Initiative on the Study of Indian Capital Markets.